Markets
Yesterday, markets still lived on hope that the pause in military confrontation between the US and Iran was an indication of negotiations behind the scenes. However, there was little concrete news from the parties potentially involved in any negotiating process. Markets had to operate in some kind of no man’s land. Energy prices eased slightly further (Brent close $84 p/barrel, TTF gas €57.7 p/Mwh). The same goes for interest rates. U.S. yields fell between 3.5 bps (2-y & 5-y) and 4.8 bpn (30-y). European yields eased by a similar amount, but here the short-end outperformed (2-y Germany -4.5 bps, 30-y -1.8 bp). The difference in reaction function probably had to do with investor caution ahead of today’s Fed meeting. In addition to the conflict around Iran, the technology sector remains a source of nervousness, especially in some Asian markets. The impact on broader US and European indices remains orderly for the time being, although the Nasdaq is testing the important support around 25.000. Again little enthusiasm on FX markets. EUR/USD is stuck in a narrow band near 1.14 (close 1.139).
Overnight, the ceasefire in the Middle East was disturbed by the US reporting that it intercepted an Iranian attack against American targets in the region. Oil rebounds to $87 per barrel. The impact on interest rates and the dollar (EUR/USD 1.14) is limited for the time being. USD/JPY even eases slightly (163.55).
Today, the conflict in the Middle East and uncertainty on the AI/technology sector (Meta and Microsoft results today) must share attention with the Fed as it decides on its policy. Will the Fed policy rate (3.50%/3.75%) already be raised? Fed Chairman Warsh’s intention to reduce forward guidance for sure is already paying off. The market is not certain. Even as the Fed Chair in its recent communication stressed that the Fed will deliver on its mandate of price stability, he didn’t give any concrete hints on what this might mean for (the timing of) any interest rate steps. The majority in the market still expects a 25 bps Fed rate hike only at the September meeting. Still, the money market is pricing a one in three chance that the trigger will be pulled today. The arguments for and against action today are both economic (e.g. waiting after favorable inflation figures for June) but also tactical in nature (Warsh can gain credibility if the Fed already acts ‘preventively’ today). Last month’s Fed dots (9 members anticipating at least one rate hike this year) only adds to the idea that it might be a close call today. If the Fed would hike rates already today, it could give the dollar a boost, although that is certainly not the Fed’s main concern. In any case, tonight at 8 p.m. (CET), for the first time in a long time the markets can prepare for a Fed interest rate decision whose outcome is not a priori more or less certain.
News & Views
Australia CPI data published this morning printed on the softer side of expectations. In a monthly perspective, prices in June eased -0.1% M/M, bringing the Y/Y measure to 3.8% from 4.0%. The consensus expected an unchanged Y/Y figure at 4.0%. The largest contributor to annual inflation in June was Housing, which rose by 6.8 per cent. The next largest contributors were Food and non-alcoholic beverages and Recreation and culture, both rising by 3.3 per cent. Annual Housing inflation of 6.8% reflects rising costs for Electricity and New dwellings. However, the rise in electricity prices was mainly due to the government finishing rebates which reduced households’ energy prices. Y/Y inflation for new dwellings reached its highest level in almost three years (5.8%), driven by builders passing on higher material and labour costs, the ABS analyses. Annual inflation for Transport moderated to 0.1% Y/Y, down from 3.3%. The trimmed mean June underlying measure was 0.3% M/M and 3.6% Y/Y (Unchanged). Quarterly headline inflation slowed from 1.4% in Q1 to 0.6% in Q2. Trimmed mean quarterly inflation remained at 0.8% Q/Q and 3.6% Y/Y. Even as the figures remain above the RBA 2-3% target, it was below its May forecast (3.8%). The 3-y Australia Government bond yield eases 7.5 bps this morning to 4.49%. Markets reduced expected probability of an additional RBA rate hike early next year to about 60% (was about 90% yesterday). The Aussie dollar dropped from the AUD/USD 0.697 area to currently trade near 0.6955.
